Stock market preview for the week of July 21, 2014

The indexes took a fairly large pullback on Thursday, but rebounded to regain most or all of these losses on Friday.

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The S&P 500 pushed higher in three sessions and finished the week 0.54% higher. The index has finished higher in 44 of the past 67 sessions.

Average daily volume levels increased 8.57% compared to the average daily volumes of the previous week. The week’s highest volume was seen in Wednesday’s push higher and the lowest was seen on Monday. The week the five day volume variance increased 0.37% above the previous week to 23.53%.

The S&P 500 continued higher Monday, but Tuesday gave up some of these gains. Wednesday pushed higher and finished the session within likely resistance of the 100 L. Thursday dropped rather sharply lower after news that a Malaysian Airlines passenger plane was shot down in the Ukraine and that Israel would begin an invasion into Gaza. Although not to volatile levels, the 1.18% loss was the first move of 1% or greater seen on the S&P 500 since a 1.05% increase on April 16 and the largest seen since a 2.09% drop on April 10. Friday rebounded nearly as strongly, regaining most of the previous day’s losses and providing a second straight day with a 1% or greater move as the index finished 1.05% higher.

Thursday’s drop appeared to be a knee jerk reaction to bad news, with Friday’s rebound nearly correcting for that overreaction.

The index charts of the Dow Jones Industrial Average, S&P 500, NASDAQ, New York Stock Exchange and Russell 2000 were somewhat mixed for the week.

The Russell 2000 continued to have the most bearish looking chart. It began to rebound Monday, finishing back above the 50 EMA but slipped in the next three sessions, finishing each below the 50 EMA. As was seen on the other indexes, Thursday’s losses were the largest of the week, the Russell rebounded to regain all of Thursday’s losses and finish slightly higher than Wednesday’s close. The Russell has seen two lower lows surrounding a lower high.

The New York Stock Exchange had two higher closes around Tuesday’s lower close, with both higher closes finishing above the 13 EMA. Thursday slipped deeply, but turned higher from a low higher than the previous cycle. Friday’s rebound nearly regained Thursday’s losses, and back above the 13 EMA.

The NASDAQ rebounded Monday finishing the session back above the 13 EMA, Tuesday took some of the gains back, but maintained a close above the 13 EMA. Wednesday push slightly higher before Thursday slipped steeply lower, finishing below the 13 EMA and turning lower from a lower high, but the drop also rebounded from a higher low. Friday rebounded strongly covering all of Thursday’s losses and adding to Wednesday’s gains.

The S&P 500 continued higher Monday, before it also slipped lower on Tuesday. Wednesday’s high turned lower just short of the previous high, while Thursday large pullback rebounded higher than the previous cycle low, but the index finished the session below the 13 EMA. Friday’s rebound fell a little short of covering Thursday’s losses, but finished back above the 13 EMA.

The Dow Jones pushed and closed back above 17,000 on Monday and increased on these gains Tuesday and Wednesday. Wednesday also finished at record highs. Thursday looked to increase on these gains before it slipped steeply to close just below the 13 EMA. Friday rebounded to regain most of these losses and finish well above the 13 EMA. Thursday’s low was well above the previous cycle low and followed a push to a new high, confirming the Dow’s uptrend. With four of five higher finishes and a push to record highs the Dow’s chart is currently the most bullish.

The Thursday’s news related pullback was steep, but most of the indexes rebounded from a higher low in this drop and all saw Friday regain most or all of these losses. It seems possible the indexes could continue higher in the week ahead.

US Treasury Charts

The 20 year US Treasury Bond slipped in the first two sessions before seeing a small rebound Wednesday. Thursday opened with a gap higher and continued higher finishing well above the previous cycle’s high. Friday finished lower but well above session lows and Thursday’s open. Although there continues to be little reason for treasuries to see higher prices, prices have moved higher and this chart is showing some bullishness again.

The long term Treasury charts appear bearish for stocks.

The interest rate on the 10 year US Treasury Note slipped in only two sessions, but finished well lower than the previous week as Thursday’s drop was very steep and Friday’s rebound failed to recover much of this loss. This chart has seen two lows lower than the previous cycle and a lower high. It has finished higher in only two of the last 11 sessions, with one finishing even. Although the chart has not yet established a downtrend, it looks rather bearish at the moment. This chart is fully oversold.

Gold trended lower Sunday night but the drop steepened at the Hong Kong open to finish a little under 1333.

The drop steepened further In Hong Kong Monday morning just before the London open, reaching about 1318. It rebounded to 1320 after the London open and traded flatly within a couple points higher of that until turning steeply lower just before the New York open. The fall continued into New York trading reaching a low of about 1303 before leveling out again. It traded flatly between that low and 1309 for the remainder of the night, finishing a bit under 1307.

Tuesday trended slowly higher to about 1312 in London before reversing trend in a slow bouncy retreat to about 1306 by midsession in New York before dropping sharply to about 1293. It rebounded quickly to about 1300, trended lower to 1292 and then traded mostly flat but slowly higher for the remainder of the night finishing a touch under 1296.

Wednesday started near the day’s lows at about 1295 and traded within a few points higher of it until rebounding from a dip near the day’s low in New York to about 1303. It slipped slowly off that high to about 1297 trading from that low to about 1300 until breaking slightly higher in Hong Kong to finish the night a little above 1302.

Thursday gold continued to move higher in Hong Kong to about 1307, then trended lower to about 1300 just before the New York open. It rebounded quickly back to 1306 shortly after the open then slowly lower for a few hours before spiking to 1324. It slipped off this high to about 1315 and trended higher to 1325 just before the Sydney open, but began to trend lower from there to finish the night a little above 1315.

The trend continued lower Friday until reaching about 1305 in New York and then flattening within a few points of this low until just before the NYMEX close where it began to push higher again in a slow bouncy trend into the New York Spot close of 1311.00 and lower than the New York Spot close of 1339.00 last week.

Gold broke a five week string of gains with the lower close in New York.

S&P 500 Constituent Charts

Many of the constituent charts continue to hold bullish trends.

There are a fairly large number of constituent stocks showing possible topping patterns in their long term charts as they have stalled at long term resistances near previous highs. At this time there are few that appear to be seeing failures in these patterns, although several are trending lower from these highs, but few are breaking higher either. Several constituents also appear to be finding resistance at resistance levels below long term highs. Some that were in runs to new all-time highs appear to be showing some signs of faltering in these runs, while others continue to show bullishness in these runs.

These charts continue to give reason to be cautious at the current time, as failures from long term highs are often seen during large drops on the index.

Most that reported earnings in the past week beat expectations, and those that missed were for the most part small. It continues to look like earnings could come in 2% to 6% higher than expected. Beating expectations might not be enough to push some stocks higher. Not all the constituents that did better than expected on earnings saw their stock prices increase into these beats, and a few saw very large retreats.

Although the drop on Thursday was the largest seen in quite some time, it appeared to be a knee jerk reaction to bad news and was nearly offset by cooler heads in the rebound on Friday. Although many of the charts are showing reason to remain cautious most of the constituents look like they could continue higher for the time being. Most continue to report very good earnings and a fairly large number are scheduled to report in the coming week. It seems fairly likely the index could continue higher in the week ahead.

Indicators

Although the indicators featured in these articles are not always correct, they have been many times and being so they are worth reading about and taking note of.

The +2% L, -2% L, 90 E and 100 L indicators are currently active. The 90 E will expire after the close on Monday. See a more detailed description of most of the indicators developed through research and featured in these articles here. The descriptions of these indicators were recently updated to more closely reflect the current level of development of these indicators.

The +2% L did not provide a correct indication in the past week.

The –2% L did not provide a correct indication in the past week.

The 90 E will expire after Monday’s close. Both the +2% and -2% indicators will remain active past this expiration, provided the index remains within potentially volatile resistance.

The S&P 500 continued higher Monday, with the low rebounding near the 1970 MRL at 1969.86 and finished at 1977.10. Tuesday gave up some of these gains but rebounded from a low of 1965.34 to finish at 1973.28. Wednesday opened higher but dipped to 1975.67, near the lower resistance boundary of the 100 L, before pushing higher into likely resistance at 1983.94 and slipping to finish at 1981.57. Thursday dropped rather sharply lower before finding support near the upper resistance of the 1940 to 1955 MRL at 1955.59 and rebounding to finish at 1958.12. Friday opened higher and after dipping slightly to low of 1960.82, continued rather strongly higher to recoup most the earlier losses and finish the session at 1978.22.

A second pullback from within likely resistance within the lower level of the 100 L was seen from Wednesday’s high of 1983.94. The index dropped rather steeply on Thursday due to news of the Malaysian jet tragedy, but found support near the 1904 to 1955 MRL before rebounding quite strongly on Friday. Rebounds seen near a previous resistance level is often a bullish indication.

As the index works its way into the 100 L at 2000 (from 1975 to 2025) it will begin to enter the level identified as a potential topping area during data evaluation beginning in 2008. These data evaluations make it appear resistances met between 2000 and about 2140 could have the potential to cause a large drop, possibly reaching crash proportions.

These data evaluations do not mean a crash is certain within the 2000 to 2140 range. The data evaluations only identified this level as one with high potential to cause a large drop, possible reaching the 25% to 35% range; although a fall seen low in this range might not reach these levels. This range also holds most of the specifications identified in the first crashes of a market entering into a secular bull.

At the current time there does not appear to be a catalyst for this crash.

Although the 100 L resistance at 2000 has the potential to produce a large drop, these evaluations suggest it is probably the least likely level within the range that a drop reaching crash proportions would be seen at. It is still possible a crash could be seen there, it is just not as probable as at other resistances within this range.

The resistance within the 100 L at 2000 does appear to have the potential to cause a significant drop, possibly nearing the 5% level, but probably remaining within or near the 3% to 5% range if a significant drop is seen there.

Upward tensions in constituent stocks appear to remain mostly intact, making a significant drop at this level continue to seem somewhat unlikely.

A fairly large number of the constituents appear to be in long term topping patterns. Although some are in downtrends off these tops, relatively few of these patterns have failed, but few have broken higher too. Failures from long term topping patterns are not at levels that would be of concern at this time, but continue to pose somewhat of a threat for a possible move lower later.

It looks likely the bulk of the resistance in the lower half of the 100 L could be seen from 1980 to 1995 with the index seeing a second retreat from within this likely resistance in the past week. A fall to and rebound from a significant drop in the lower half would probably soften resistance in the upper half of this level likely to be seen from 2010 to 2020 considerably. Although the climb would likely slow as it reaches the upper resistance in this rebound, it seems fairly likely the index could move past it without further incidence.

If the index moves into the upper resistance level without first seeing a significant pullback, the resistance in the upper half becomes somewhat more potentially dangerous due to entering into the level research has identified as a possible topping area from 2000 to 2140. Since this research suggests the resistance of the 100 L at 2000 is probably the least likely area this top would occur, it still seems fairly likely a significant drop from this level probably remains within or near the 3% to 5% range, but the move above 2000 increases the risk it could fall deeper, possibly to crash levels.

Current Cautions

The index turned lower for a second time from likely resistance within the lower half of the 100 L during the past week; however it also rebounded strongly from support found above the 1940 to 1955 MRL after this retreat. The large pullback Thursday was due to bad news, but the quick rebound Friday looks like it was a correction of the earlier retreat.

As the index works its way into the 100 L at 2000 (from 1975 to 2025) it will begin to enter the level identified as a potential topping area during data evaluation beginning in 2008. These data evaluations make it appear resistances met between 2000 and about 2140 could have the potential to cause a large drop, possibly reaching crash proportions.

Although the 100 L at 2000 does not appear to hold crash potential, it does appear to have the potential to provide a significant drop. It seemed possible earlier upward tensions in many of the constituent stocks could exhaust as the index moves through this level. It currently appears most of these tensions remain intact. IT seems possible these upwards tensions could continue past the 100 L and in turn it makes it seem somewhat less likely a significant drop could be seen at this level. If in fact a drop is seen within the 100 L, it seems possible it could reach near 5% and probably remain within or near the 3% to 5% range.

The index moved into and pulled back from likely resistance within the lower half of the 100 L at 1980 to 1995 for a second time. A fall to and rebound from a significant drop in the lower half would probably soften resistance in the upper half of this level likely to be seen from 2010 to 2020 considerably. Although the climb would likely slow as it reaches the upper resistance in this rebound, it seems fairly likely the index could move past it without further incidence.

If the index moves into the upper resistance level of the 100 L (or past it into a higher resistance level) without first seeing a significant pullback, the resistances above 2000 becomes more potentially dangerous due to entering into the level research has identified as a possible topping area from 2000 to 2140. Since this research suggests the resistance of the 100 L at 2000 is probably the least likely area this top would occur, it still seems fairly likely a significant drop above 2000 within the 100 L would probably still remain within or near the 3% to 5% range, but the move above 2000 increases the risk it could fall deeper, possibly to crash levels.

The next higher resistance once the index moves past the 100 L is likely to be seen in the midrange resistance from 2035 to 2055. This level appears to have the potential to cause a very large drop possibly reaching crash potential. This resistance level also holds the level of concern at 2040. Recent data evaluation pointed to resistance at 2040 as the most likely area that a crash would be seen between 2000 and 2140. The research also suggested if this crash were to occur, it probably finds bullish support somewhere near the two previous tops in 2000 and 2007. Although the crash potential is within the 25 to 35% range, this evaluation makes a fall from near 2040 seem more likely to produce a drop of less than 30%.

Current chart formations tend to make a fall in excess of 10% seem possible within the 2035 to 2055 MRL, depending partly on the outcome within the 100 L resistance level, but a drop that reaches crash proportions still seems somewhat remote at this time.

A possible signal that an area of resistance could hold potentially larger drop potentials would be the presence of several volatile daily moves (those of 2% or greater) within a relatively short time period, for instance three or four within a few weeks or less. The larger the number of volatile moves, the more potentially dangerous a resistance becomes.

Some concerns as we move above the 2000 level include:

The index appears to be running high in the trend off crash lows. Although runs above the upper trend line have extended for several months in the past, when a pullback is seen from above the upper trend line it tends to be deeper than those normally seen during the run. These pullbacks often fall to or below the lower trend line.

Several high flying stocks appear to be showing possible topping patterns common prior to large drops, although these patterns could be partially explained by the lack of splits in these stocks. These patterns do not always lead to large drops and several of these stocks appear to be in moves higher that could reach new highs.

In addition, a fairly large number of stocks trading below the $100 level are also stalling at long term resistance levels, with the numbers of stocks in these potential topping patterns increasing as stocks that are in runs reach previous highs. Breaks higher or lower from these patterns are currently relatively small but the durations stocks have held these patterns are increasing. Stocks that stall and fail to move higher for long durations generally tend to lose investors over time, and this generally tends to set downtrends in motion. The longer these stalls persist, the more likely they are to begin fail and to trend lower.

Although the numbers of constituents in this category is not large, chances seem remote that some of the constituents that have continued in runs or held high prices could produce earnings to justify their current stock prices in timeframes investors are normally willing to wait. These runs higher could continue, but any sign that longer term earnings projections are too high, failures or continued failures to meet expectations, or an overall change in market direction could cause stocks trading well forward of current earnings to see large fold backs.

Some constituents appear to be over extending moves higher caused by earlier upward tensions. This could increase downward pressure on these stocks when they finally turn lower. These numbers are also small at this time.

At the current time there does not appear to be a catalyst for a crash. Many crashes occur due to stocks becoming overpriced to earnings. Without a substantial reduction in earnings, it would be difficult to consider stocks overpriced based on the actual unadjusted average P/E’s during the time the S&P 500 was an index. Although some are overpriced, most are not and the average P/E is still fairly historically low.

Earnings reports for the second quarter have been mostly better than expected; although not all beating projections are seeing their stock prices increase. Early reports are sparse and a real feel for the quarter’s earnings won’t come until later in the month. It seems fairly likely that overall earnings could be very good for the quarter, possibly reaching 2% to 6% above the current projections.

The absence of an apparent catalyst for this crash does not mean one would not materialize as the index reaches this level. There is also the possibility investors could overreact to news events that probably should not take the market to these depths. Pullbacks seen during the summer of 2010 and 2011 were much deeper than rational evaluation of the data indicated they probably should have been. These falls also came during a time when huge increases in earnings were being seen, with near or over 70% of the constituents beating their earnings projections. This makes it seem somewhat possible this fall could come even if earnings are reported higher than expected.

The overall number of active indicators is decreasing, another will expire on Monday and two others could become dormant once the index moves out of potentially volatile levels. Decreasing numbers of active indicators generally indicates a decreasing chance of volatility. Periods of low volatility are generally bullish. This decrease has occasionally acted contrarian to the norm in the past.

The long sideways move at the 1883 resistance appears to have increased upward tensions in many of the constituent stocks. Many of these upward tensions appeared to remain intact. It still seems possible many could remain intact past the 100 L at 2000. These tensions could work to reduce bearish volatility at the potential resistances within the 100 L at 2000.

Ultimately the direction that the stock market takes from here could be influenced by news events.

Average daily volume levels increased 8.57% week over week and the five day volume variance increased 0.37% to 23.53%. Although the index saw fairly large retreat Thursday, volume levels remained fairly low, indicating a lack of sellers into this retreat. Overall volume and variance levels appear to be maintaining near bullish levels.

There continues to be many reasons to be bullish at the current time; however the index is nearing an area of potential concern and some caution should be exercised. Any pullbacks in stock prices seen along the way are probably a good opportunity to add although some flexibility in these investments could become necessary later. If a large pullback is seen on the index, it could be prudent to increase equities holdings into this drop. It could also provide the best remaining opportunity to take profits in gold holdings.

If the index continues within the trend established off the crash lows, it seems possible it could reach the 2000 to 2100 level in five to 14 months if it reaches this level near the upper trend line and within 32 to 38 months if it reaches this level near the lower trend line. The data suggests the Midrange Resistance Level (MRL) at 2035 to 2055 could hold the resistance level of concern within this range at 2040. More details of this potential resistance can be seen in past articles.

It appears the index is running somewhat ahead of the projection to reach 2000, indicating it is running above the upper trend line.

These data evaluations do not mean a crash is certain within the 2000 to 2140 range. The data evaluations only identified this level as one with a high potential to cause a large drop, possible reaching the 25% to 35% range; although a fall seen low in this range might not reach these levels. This range also holds most of the specifications identified in the first crashes of a market entering into a secular bull.

Please note there is no established resistance in the MRL levels before the index has reached these levels. Several instances have proven to hold resistance once reached; however MRL levels that the index has not yet reached are only the most likely levels that resistance will be seen based on research. Back tests of the data used to project these resistance levels work well, but they are not always exact, and these resistances could react sooner or later than expected, it is also possible the resistance will not be seen at all.

If the market should fall to crash levels, the blue chips, stocks with very low or no debt, and stocks with histories of stable dividends tend to fair best in pullbacks on a percentage basis. Caution should be used in stocks that have seen dividend increases well beyond those normal seen. Moderately priced stocks tend to lose less on a dollar per share basis. From a psychological standpoint this could be an important consideration, it is easier for an investor to hold a stock that falls from $50 to $25 without selling than it is to hold a stock that falls from $100 to $50. Even though the percentage lost was the same, the larger dollar value erosion of share price gives many the perception of a greater loss and a much larger distance for the stock to rebound to regain these losses, and this perception could lead to further sales of higher priced stocks in a downturn.

A crash in stock prices could be the last hurray for gold investors for many years to come.

Disclosure: Ron is currently about 76% invested long in stocks in his trading accounts, reflecting a virtually unchanged investment level from the past week. Although this level remained unchanged, Ron bought one issue with the cost of this purchase partially offset by the sale of one issue and dividend payments. Ron feels comfortable with his investment level at the current time. However he has and will continue to sell stocks that reach long or short term targets and also continue to add stocks he feels are at a great value through a variety of buy orders. Ron will receive dividend payments from seven issues in the coming week and 11 in the following week. If no further investment changes are made during this timeframe, his investment level would not change due to these dividend payments.

Some of the trades made during the past week may have been due to repositioning investments as discussed in previous articles.

Disclaimer: The information provided in the Stock Market Preview is Ron’s perception of the current conditions and what he thinks is the most probable outcome based on the current conditions, the data collected and extensive research he has done into this data along with other variables. It is intended to provoke thought of the possible market direction in his readers, not foretell the future. Ron does not claim to know what the stock market will do. If the stock market performs as expected, it only means he is applying the stock market history to the current conditions correctly. His perception of the data is not always correct.

This article is intended to provoke thought about investment possibilities. Acting on the information provided is at your own risk. You are urged to do your own research, and where appropriate, seek professional investment advice before acting on any information contained in these articles.

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Ron Zimba has spent thousands of hours researching the stock market including detailed studies of the S&P500. These studies have unlocked market tendencies that have allowed him to make some very accurate market forecasts. He reads hundreds of earnings reports and uses the information within across sectors. He is a frequent blogger on ClearStation known as ronz and several there credit him with much of their recent trading success. Email him at this address.